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Cash Dividends & Dividend Payment

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  • 0:04 Dividends
  • 1:00 Types of Dividends
  • 2:48 Standard Method
  • 4:51 Lesson Summary
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Lesson Transcript
Instructor: Natalie Boyd

Natalie is a teacher and holds an MA in English Education and is in progress on her PhD in psychology.

When a company decides to pay a dividend to shareholders, they first have to decide what type of dividend to pay. In this lesson, we'll examine the most common types of dividends and look at the timeline for cash dividend payments.

Dividends

Ariel is on the board of directors for a company that is publicly owned. That is, anyone can buy stock in the company and own a little piece of it. Like all publicly owned companies, Ariel and her fellow board members want their company's stock to be a good investment. At each meeting, they try to focus on how they can reward their stockholders and entice more people to invest. After all, the more people invest, the more money the company will raise. That's a good thing!

At their latest meeting, someone suggested that the company pay a dividend, or a payment, from the company's earnings to the shareholders. Dividends are kind of like a bonus for stockholders and are a common way that a company can make its stock more enticing to potential investors.

Ariel thinks that dividends sound good, but she's not sure exactly what they are or how they're paid out to stockholders. To help her understand better, let's look at the types of dividends and the standard method for cash dividend payments.

Types of Dividends

As we said, one of Ariel's fellow board members suggested that the company pay a dividend to its shareholders. But how should they pay? Should they give shareholders cash? More stock? A bar of gold? A new car?

In theory, a dividend can be anything. But in practice, there are three common types of dividends:

1. Cash Dividends

The most common form of a dividend is a simple cash dividend. This is when a company provides money (usually in the form of a check or bank transfer) to its shareholders. For every share of stock, an investor will receive a certain amount of money. For example, in addition to being a board member, Ariel also owns 1,000 shares of stock in the company. If the dividend is $1 per share, then Ariel will receive $1,000. Someone who owns 100 shares will receive $100. It's pretty straightforward.

2. Stock Dividends

Some companies prefer to keep cash in the company, instead of paying it out to shareholders. In that case, they often reward investors with a stock dividend, or increasing the number of stock shares in the company and distributing the shares among stockholders. For example, if the company decides to reward investors with a stock dividend of 1/4 share for every share owned, then Ariel will go from owning 1,000 shares to owning 1,250 shares. That is, she'll receive 250 extra shares, which is 1/4 of 1,000.

3. Dividend in Kind

Some companies don't want to give up cash, but they also don't want to increase stock in the company. That leads some companies to offer a dividend in kind, which is a product or physical gift as a dividend. For example, a gum company might offer packs of gum as a dividend for all its shareholders.

Standard Method

As mentioned, the most common type of dividend is a cash dividend. This is the most common because it is most attractive to investors, and remember that the point of a dividend is to entice people to invest, or buy stock, in the company.

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